Tuesday, March 31, 2020
Japanese Banks’ Refusal to Roll Over Loans to Korean Banks May Trigger Financial Exodus from Korea
Korean Authorities Dismiss Concern about Japan's Financial Retaliation
Japanese Banks’ Refusal to Roll Over Loans to Korean Banks May Trigger Financial Exodus from Korea
  • By Yoon Young-sil
  • August 6, 2019, 10:45
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The Japanese government may target the Korean financial market as part of its retaliation against Korea.

Concern is growing among domestic financial industry officials as the Japanese government may target the Korean financial market following restrictions on exports of semiconductor core materials to Korea and the exclusion of Korea from its whitelist of countries eligible for preferential treatment in export procedures.

When Japan takes a financial revenge on Korea, Japanese financial companies could refuse to roll over their loans to Korean financial companies. According to the Financial Supervisory Commission, as of the end of June, Korean financial institutions’ borrowing from Japanese financial institutions amounted to US$15.32 billion, of which US$7.21 billion is to mature within one year.

In the case of banks, 58.6 percent of their borrowings, or US$5.43 billion, must be repaid within one year. If Japanese financial companies refuse to roll over the loans, the funding rates of Korean financial firms will temporarily go up as they have to borrow from financial companies in alternative countries. Some financial experts say that this could cause a sense of uncertainty about the Korean financial market and prompt other foreign funds to leave Korea.

In response, Korean financial authorities contend that the credit ratings of Korean financial institutions are so high that they can fund foreign currencies from other countries without difficulty. They note that domestic banks' foreign currency borrowings from Japan total US$9.26 billion, accounting for only 6.6 percent of their total foreign currency borrowings, while their foreign currency reserves stand at US$29.2 billion, exceeding the US$25.5 billion in short-term foreign currency borrowings that will mature within the next three months by over US$3.7 billion.

"Japanese banks such as Mizuho and the Mitsubishi Financial Group (MUFG) are not taking any particular moves in rolling over their loans. Borrowings are being normally renewed,” Sohn Byung-doo, vice chairman of the Financial Supervisory Commission, said in a meeting with reporters, eliminating the market’s concerns.

However, some experts say that as the Korean financial market is vulnerable to external factors, it is difficult to predict what would happen if Japan initiates financial retaliation against Korea. In particular, in the stock and bond markets where foreign investors account for a large portion of investors, there have been many cases in which foreign funds left Korea en masse due to external shocks regardless of the fundamentals of the Korean economy.

The Financial Supervisory Commission held a meeting on financial market situations on Aug. 5 before the opening of the financial markets. It sought to stabilize the market by noting that foreign capital inflows, credit default swaps (CDS) and foreign exchange reserves are stable both in the stock market and bond market. But the stock market and the foreign exchange market all moved significantly up and down all day long.

In fact, in Japan, some people, in particular, ultra-right media outlets and politicians openly say that the ultimate aim of Japan’s economic retaliation against Korea is causing a huge financial crisis in Korea. This indicates that Japan’s economic retaliation targets the Korean financial market, which is vulnerable to outside variables. They suggest that the Korean economy will be hurt if Japanese banks begin to refuse to guarantee Korean companies’ letters of credit.

However, Korean financial authorities explained that Korean companies use letters of credit in 15.2 percent of their trade settlements, and that the percentage of Japanese banks guaranteeing letters of credit issued by Korean banks for imports from Japan is only 0.3 percent.